2010 Scrip 100 - Survivors of the shakeout
This article was originally published in Scrip
Crunched credit wiped out many biotech firms in 2009, yet some emerged from the wreckage leaner and stronger. How did they do it, asks Dr Sukaina Virji-Jeganathan.
Despite hints of the emergence of green shoots in the biotech sector, these are of very little comfort to firms still struggling to raise cash and no comfort at all to those that went to the wall over the past 12 months.
Companies that have managed to raise funds often paid a high price: massive dilution, expensive debt and/or (usually 'and') loss of long-term upside. Many smaller businesses have gone into a sort of hibernation mode, cutting staff and projects down to almost zero with a view to waking up when the financial climate improves. Other firms have been snapped up at bargain prices.
On a more positive note, we have seen the emergence of creative business and financing models as companies and investors do their best to outwit the crisis. From outsourcing activities and spinning-out assets, to tapping alternative sources of cash, biotech companies are proving to be flexible and adaptable to these harsh times.
corporate VCs aligned
While many venture capital (VC) firms lowered their profile as sources of financing were squeezed, for Abingworth it appeared to be business as usual. The firm's managing partner Dr Stephen Bunting explains that, while VCs are under significant pressure, "in reality the markets have been tough for almost 10 years; we've had time to adapt".
One trend is more co-operation between traditional VCs and corporate venture funds. "They are taking on more old-style VC risk," Dr Bunting observes. "It has come about because of an alignment of interests between VCs and pharma companies. Their taste for deals overlaps with ours."
Dr Bunting believes the general consensus is that VCs find working with their corporate counterparts a positive experience. "A few years ago we might have felt they were conflicted but now, quite frankly, the benefits – their sector expertise coupled with the fact they are not going to run out of cash – outweigh this."
One example is Avila Therapeutics, an Abingworth portfolio company based in the US. It closed a $30 million series B round in July with the Novartis Option Fund, a new investor, leading the round.
Avila is developing a pipeline of novel, preclinical, protein-silencing covalent drugs, based on its Avilomics platform to treat viral infection, cancer and autoimmune disease.
The Novartis Option Fund's investment is coupled with an option to a specific therapeutic programme, but neither of the company's lead projects, according to its CEO Katrine Bosley.
"Bringing a big pharma onboard this time around was great for us," she says. "We were lucky in that we had a strong investor base from our previous round, so a slightly different voice at the table – particularly one with a long-term view – was appealing. In addition, we know we can't do everything ourselves, so we need to engage with pharma."
On successful fundraising, Ms Bosley comments: "Pharma is looking externally for innovation. Being able to articulate why your company is different and why that difference matters is the key to making your case for investment."
Meanwhile, Dr Francesco de Rubertis, general partner at Index Ventures, points out that when it comes to fundraisings, there are fewer "full Hollywood productions" these days.
Dr de Rubertis says his team is assessing more project-focused opportunities, rather than those that encompass the vision of entire companies. These days, he says, teams merely selling know-how are less likely to become fully-fledged companies. "VCs are looking for frugal and/or later-stage companies."
Later-stage often means public companies, and in this climate, VIPEs (venture investment in public equity) are gaining traction. A PIPE (private investment in public equity) with added bite, VIPEs allow investors to have a say in how companies are run (contrasting with the more passive approaches typically associated with PIPEs).
The term was coined by Abingworth following its lead in a fundraising by the Norwegian firm Algeta early in 2009. The cancer-focused company raised NOK245 million ($35 million) in a private placement of 22.3 million new shares led by Abingworth.
Algeta will use the funds to continue the development of its lead product Alpharadin for the treatment of bone metastasis arising from prostate cancer, which is in Phase III trials.
de-risking investment
One key objective is minimising the risk of costly clinical development that could ultimately prove unsuccessful. Here, Avila's protein-silencing technology offers an important advantage that must have played a part in convincing its investors – the ability to provide mechanistic proof-of-concept for its products from early-stage clinical trials.
Avila's products are based on the ability to silence the activity of a specific disease-causing protein in a particular disease. Measuring whether this protein has been "silenced" through covalently binding with one of Avila's products simply by way of a blood sample analysis is of huge benefit.
Another biotech firm that raised critical funds in 2009 was arGEN-X of the Netherlands, which pulled in €12.5 million in series A funds. Forbion Capital Partners and Life Sciences Partners co-led the deal.
Formed last year, arGEN-X is focused on the discovery and development of human monoclonal antibodies using its SIMPLE (Superior Immunodiversity with Minimal Protein Lead Engineering) antibody platform. The technology is based on the discovery that the variable domains of certain antibodies of the camelid animal class are very similar to their human counterparts.
"We started fundraising towards the end of last year when things were tough," the firm's CEO Tim Van Hauwermeiren recounts. "Our aim was to raise enough money to fund our business plan over the next two years, and we achieved that. We can firmly validate our portfolio of products at the preclinical stage, and this is very valuable [to investors] in the current climate."
Dr Christina Takke, a principal at Forbion and a member of arGEN-X's supervisory board, concurs that management and experience are important, adding: "we like companies with platforms that can make products".
Dr de Rubertis from Index Ventures is of the same opinion. A "frontier-moving platform" will always generate interest, he says. "The unmet need in pharma pipelines means that anything with real potential to make new drugs is going to generate interest."
options
Despite the obvious need for new products, pharma companies do not like taking unnecessary risks. Dr de Rubertis expects to see an increasing trend toward investors taking options on promising therapeutic programmes (as Novartis did with one of Avila's programmes), to delay the serious decision-making until further down the development pathway when more data are available.
"Options are a good fit between smaller companies who need money to get R&D to key inflection points and pharma companies keen to make the call on a programme at the end of Phase II."
syndication slowdown
The credit crunch has been tough for many VCs. "It's very frustrating for us. Many of our colleagues – good VCs that have been important co-investors in the past – are finding it difficult to raise money," says Abingworth's Dr Bunting. This has impacted on the length of time it takes to form an investor syndicate.
"With arGEN-X we managed to attract a good syndicate with the right level of commitment to the company. But the more usual scenario … is that it takes a long time to build a syndicate," explains Forbion's Dr Takke.
Index Ventures circumvented this problem earlier in 2009 by becoming the sole investor in Versartis, a joint venture with the US firm Amunix, which has been set up to exploit the clinical potential of novel drugs using Amunix's recombinant PEGylation (rPEG) technology.
Versartis closed a series A financing in June with an initial commitment of $11 million from Index, which has the option to invest an additional $5 million. The company says it has preclinical proof-of-concept for three product candidates in its pipeline, including exenatide and IL-1ra for diabetes, and hGH for growth hormone deficiency.
stronger together
A recent strategic merger proposal between two oncology-focused biotech firms highlights why consolidation looks set to continue. In early October 2009, YM Biosciences of Canada and Cytopia of Australia revealed plans to join forces. YM's business model involves in-licensing cancer-related products that require further development, management or financing.
Commenting on the proposal, YM's chairman and CEO David Allan said: "After assessing numerous global in-licensing opportunities, we determined that Cytopia's products were an ideal complement to our current portfolio."
For Cytopia's CEO Andrew Macdonald there were three motives for the merger: access to a broader pipeline of therapeutics; YM's network of researchers and investigators; and, arguably most importantly, access to North American capital markets.
Cytopia's lead products are CYT997, a novel vascular disrupting agent in Phase II trials, and CYT387, a novel orally active JAK2 inhibitor that recently received clearance from the US FDA to commence a Phase I trial in myeloproliferative disorders.
YM's lead drug is the EGFR-targeting humanised monoclonal antibody nimotuzumab. It is approved in 21 countries excluding major markets, and is in 11 clinical trials worldwide through YM's licensing partners.
2009 saw the global biotech industry lose companies and R&D programmes that held real promise for patients (see Table 1). Yet the biotech sector that emerges from these difficult times will be leaner, tougher and better equipped to deal with the pressures inherent in the discovery and development of new drugs.
Dr Sukaina Virji-Jeganathan is Scrip's biotech correspondent.
Table 1: Biotech bankruptcies, 2009*
Company | Country | Month |
Akesis Pharmaceuticals | US | January |
Cogentus Pharmaceuticals | US | January |
Dynogen Pharmaceuticals | US | February |
Neose Technologies | US | March |
DelSite | US | April |
DiObex | US | April |
Cumbre Pharmaceuticals | US | May |
Prospect Therapeutics | US | May |
Epidyme | UK | June |
Genaera | US | June |
Isolagen | US | June |
Northfield Laboratories | US | June |
Alizyme | UK | July |
Argolyn Bioscience | US | July |
Biopure | US | July |
EPIX Pharmaceuticals | US | July |
Oscient Pharmaceuticals | US | July |
Arachnova | UK | August |
Medical Marketing International | UK | September |
Neurobiological Technologies | US | September |
Altus Pharmaceuticals | US | September |
*to September 2009; qualifying companies defined as those that operated in the pharmaceutical sector only
Source: Scrip analysis